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Bobby Raines's Analyst Insights

March 10, 2014 - Buffett Decided This Dish Wasn't Very Good Looking

In addition to a flood of earnings reports, the turning of the quarterly calendar also gives investors a number of other sets of information for investors to pour over.

After earnings reports, possibly the second-most analyzed set of reports are those filed with the Securities and Exchange Commission on Form 13-F. This is where large investors and investment managers with more than $100 million in assets report what they had in their portfolios at the end of the quarter.

The "at quarter's end" nature of the filing means we can't tell what positions investment managers may have initiated and eliminated during a particular quarter, but we can track changes from quarter to quarter. This means that the filings of managers to tend to make short-term bets tell us much less than the filings of investors who tend toward longer-term investments.

Naturally, it follows that Warren Buffett, the man famous for saying "our favorite holding period is forever," publishes one of the the most scrutinized Form 13-Fs every three months. It is certainly interesting to see which positions Buffett is adding to, but given Buffett's well-known bias toward a buy-and-hold strategy, it may be more telling to see which stocks he's selling.

One particularly interesting sale Buffett made in the fourth quarter was his entire stake in Dish Network (DISH). This isn't the first time Buffett has sold an investment, but considering he established the position in the second quarter of 2013 and then sold it in the fourth quarter, it seems he changed his mind on the stock pretty quickly.

He doesn't seem to have commented on the sale specifically, and didn't mention the company at all his is most-recent shareholder letter, so we're left to speculate about what changed his mind (Even though Berkshire turned a profit on its DISH investment, I'm relatively certain something must have changed his mind about the company. Selling just because the stock went up has never really been Buffett's style.)

One possible issue is that Dish has tried, unsuccessfully, to buy both Sprint (S) and Clearwire recently. The company is currently in pursuit of Lightsquared, which is in bankruptcy, but various legal entanglements, including some possibly shady purchases of Lightsquared bonds by Dish Network's chairman Charlie Ergen, could keep that acquisition tied up in court for a while. My guess is that some part of this trio of as-yet unsuccessful acquisitions turned Buffett off to Dish.

Those things aside, the company also finds itself in the unenviable position of being in second place a satellite TV industry that has just two players. The company does compete with cable companies as well, but that simply moves DISH to third place when you look at the entire paid-television landscape.

Not everything is negative for the company, it has some relatively substantial wireless spectrum assets. Dish also exceeded expectations for the number of subscribers it added in the third and fourth quarters.

That said, the company has yet to establish a clear plan for those spectrum assets and while earnings are up now, content costs are likely to rise, and the company's auto-Hop commercial-skipping feature is loathed by broadcasters who will likely take a hard line with the company going forward.

Dish Network is also closely controlled by Ergen, who has about 84% of the votes, meaning it is unlikely that the company is going to sell itself, or any of its assets any time soon.

Dish Network is a company, and a stock, that has performed well recently, but it is in a weak position in a very competitive industry, so its recent performance could easily disappear if the competition adjusts its strategy.

if Warren Buffett decided he was done with the stock after just two quarters, that means one of the greatest investors of all time couldn't find a reason to keep owning the stock.

Traders who think DISH's bull run is nearing its end could consider a June 70/75 bear-call credit spread for a 70-cent credit. That an assigned return of 16.3%, or 57.7% on an annualized basis (for comparison purposes only). This position will return a full profit so long as the stock is below $70 at June expiration, giving this trade about 12% downside protection.